A wider net

Jan Dhan Yojana is a great move. But financial inclusion will need more than opening bank accounts.

The NDA government has flagged off its first major scheme, the Pradhan Mantri Jan Dhan Yojana. Bank account openings on the first day beat expectations, as approximately 1.5 crore new accounts were opened on day one. The PMJDY will provide a bank account, overdraft facility, and basic insurance coverage to all households. It is a welcome move towards greater efficiency in transferring welfare benefits. By putting its resources and political capital behind this scheme, the government has acknowledged that cash transfers are going to be the way forward.

The scheme is intended to promote two objectives: better transmission of social welfare benefits and also financial inclusion. If it is to meet both goals, however, the design of the scheme needs to be debated more carefully. The PMJDY is universal in nature — everyone with a bank account will be provided an overdraft facility as well as insurance coverage. But it is worth considering the circumstances in which universal coverage is to be preferred over targeted schemes. Universal coverage may have unintended consequences. For one, a uniform amount and nature of insurance assumes that everyone suffers the same kinds of risk and requires the same kind of coverage. This is incorrect in reality. Individuals suffer different kinds of risks depending on their health, occupation and a number of other factors. Providing the same insurance to everyone may create a situation where households choose not to buy sufficient insurance coverage because of the illusion of adequate coverage provided by the PMJDY. Second, some forms of universal social welfare schemes account for the fact that the well-off will not access the schemes to the same extent as the poor. The challenge of targeting the scheme to intended beneficiaries (the poor) is therefore automatically resolved. Though anyone can go to government schools and have a mid-day meal, only those who really need to, access these services. We need to carefully examine whether universal insurance and overdraft facilities will operate under the same principle.

True financial inclusion will require more than opening bank accounts. Households have diverse financial portfolios, and the poor sometimes engage in a much larger number of financial activities than the rich. A mandate driven, one-size-fits all approach is not the solution to this thorny issue. There is an immediate need for allowing and encouraging entrepreneurial innovation to cater to the varying needs of consumers of financial services.